"Truths About Hair & Nail Salon Booth Renters"

One of the most important components between a Booth Renter and Salon Owner is the contract. Deciding which one is right for the both of you is crucial in today’s mix of insurance audits and lawsuits.

As an Independent Contractor or Salon Owner, one of the first things you will want to have is a contract. Why? Oftentimes either the stylist, nail tech or Salon Owner hasn’t made all of the provisions for a proper set-up, which can lead to a run-in with the IRS.

As a Booth Renter, by paying a flat rent to the Salon Owner, you are essentially running your own Business.

In the eyes of the IRS, a Contract or Written Agreement must adhere to State and Federal Statutory Code. Although a Contract doesn’t have to be overly complicated, it must clearly spell out each parties’ rights and responsibilities. A Written Contract should specify the working relationship between the Independent Contractor and the Salon Owner. The most common resource for drawing up Contracts is a Consultant or Lawyer. However, some Salon Owners and Landlords choose to do it themselves.

Former Booth Renters who have become Salon Owners have an advantage when it comes to drawing up Contracts for Booth Renters.

Lawyers really don’t know a whole lot about this Industry. You really should send your contract to a Tax Attorney for review. You want to be protected.

Since common areas are often left out, which can result in failing an audit, we suggest using a Consultant to draw up the Contract. Consultants can advise you on Booth Renting and Employee relationships and also show Salon Owners how to be more profitable above collecting base rent.

With 95% of all Nail Techs in the United States operating as Booth Renters, it is imperative that a Business Owner have a good valid Contract between them and the Booth Renters.

The most common mistake made by someone drawing up their own Contract is that it may not be clear when it comes to Employee and Employer relationship guidelines.

The IRS doesn’t want to see any inclination that the Booth Renter is an Employee. What they want to see is a Lease that is similar to that of a Landlord/Tenant Lease.

Unfortunately, most Stylists, Nail Techs and their Owners do not have a Contract or Lease, let alone one that is signed. That is why 90% of all people operating under these guidelines could not pass an audit today by either the IRS or their State.

Having a Contract that specifies that the Operator is responsible for paying taxes and that he/she pays a flat amount of rent is not enough.

Most Salon Owners and Operators think that if an Agreement says the Operator is responsible for paying taxes and paying rent, the Business Owner is free and clear of responsibilities. Nothing could be farther from the truth.

The IRS and State are looking to see who is responsible for the payment of taxes. This tax payment will be determined from who has control of what as related to the two parties involved.

The Contract, or the lack of it, will make a determination on issues that a large percentage of Contracts do not cover and an Owner or Booth Renter does not even know until after the fact. These are just some of the items that need to be incorporated into a Contract to protect both parties.

For example, the Contract needs to include a section that clearly outlines who the Agreement is between. Often, Contracts only list the Salon Name and then list "Booth Renter" and not the Booth Renter’s name.

Who’s Involved
The first section should clearly state whom the Rental Agreement is between. Basic information should include the day, month, and year, the Name of the Salon or Landlord, and the Name of the Renter. A predominant issue that a Government Agency would look at during a status classification audit is if the Contract describes a Landlord/Tenant relationship. Our Sample Booth Rental Agreement has a clear definition of who the "Lessee" (or Booth Renter) is and who the Landlord (or Salon Owner) is. It is available to purchase and download here.

This sample lists the Salon Name and who the Booth Renter is. Instead of outlining the length of the Contract, the Contract should clearly state that the Booth Renter is solely responsible for any and all taxes due to the State and IRS.

The only problem we have with Booth Renters is that they want to be Booth Renters for tax purposes but they want to be Employees when it comes to advertising, how things are run and getting new business.

As a Booth Renter, you are responsible for paying estimated quarterly taxes. Instead of paying your tax debt by April 15, Booth Renters need to make four payments, one for each quarter of earnings.

Salon Owners should make sure that all Renters get a Form 1099 at the end of the year, which is another way to prove that even on their taxes, they’re agreeing that they’re renting space from you.

Coming to Terms and Compensation
The Compensation Section should include the Amount of Rent that is to be paid each month, or as in some cases, each week.

One of the most important sections is the terms of the Contract. The terms should clearly outline how long the Contract is for. It’s advised to secure one for at least six months to a year.

We highly recommend that the shortest period of time in a Contract be month to month, just like renting an apartment. This means that the rent would be paid monthly at the first of the month. However, the best scenario would be to have a Lease for at least a one-year period.

In order to distinguish the Landlord and Booth Renter, it’s necessary to list how Rent is paid. Both IRS and State Agencies consider it crucial how Rent is paid. For auditing purposes, the Salon cannot accept the Booth Renter’s Client checks as Rent payment.

Salon Owners should only collect rent from the Booth Renter.

Also, Booth Renters have to collect their own money for services rendered. To comply with both State and Federal guidelines, every Booth Renter must keep a cash bag and enough change on hand to accommodate his/her Clients.

Insurance
Although the Contract you choose is at the Booth Renter and Salon Owner’s own discretion, this will be the section that the IRS and State Agencies will look at first. You’ll want to have clearly defined provisions to protect your assets.

A Booth Renter will want to have his/her own Insurance Policy, including both Liability and Professional Coverage. In case of the unforeseen, a policy will protect you. If Clients injure themselves in the Salon, both the Salon Owner and Booth Renter can be held responsible.

The Contract should clearly state that the Booth Renter needs to supply a copy of his/her Liability Insurance prior to the first day of work and that the Insurance needs to be active throughout the entire rental time.

A smart option is to state in the Insurance clause that the Booth Renter, at his/her expense, shall maintain Public Liability Insurance — including Bodily Damage and Property Damage.

Alternative Conditions
Tools and Supplies
In most cases, Booth Renters are required to supply all of the Tools and Products necessary to perform Services. You can incorporate a Clause into the Contract that states this.

Booth Renters are also responsible for generating new Clientele and advertising their Services. However, Booth Renters and the Salon Owner may choose to do this together.

Consider Your Options
Whether you choose to write your own Lease for your Booth Renter or have a Lawyer or Management Company do it for you, remember that there have been very few cases where a Contract was taken to Court simply because an issue was left out.

In most cases, an audit will come from a Salon Owner and Booth Renter that have no Contract at all.

In most of these cases, usually the Salon Owners will lose because the lack of a valid Contract usually points in the direction of the Booth Renter being an Employee of the Salon Owner.

When it comes to a Contract, be sure to have a Consultant review it, whether it was just drawn up or it was an existing Contract. Remember, a Contract is the first thing that the IRS will want to review.

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